What Worked in the Past Will Not Work Now: BlackRock

During its 2023 Global Outlook presentation, BlackRock announced that the world has entered a "new regime" due to the persistent inflation and output volatility. These issues have led central banks to raise policy rates to levels that damage economic activity, rise bond yields and put continued pressure on risky assets. A new regime of greater macro and market volatility is playing out, with higher interest rates in Latin America and a global economic downturn hampering growth in the next year. The current scenario calls for a new "playbook" of investment strategies for 2023, where more granular views are taken by focusing on sectors, regions and sub-asset classes rather than broad exposures.

BlackRock said that what matters most is how much economic damage is already reflected in market prices. "We believe this new regime where central banks are causing recessions instead of cutting rates to prevent them calls for a new investment playbook, both strategically and tactically. Navigating more volatile markets will require more frequent portfolio changes," said Axel Christensen, Chief Investment Strategist for Latin America, BlackRock. The group said that long-term government bonds will not play their traditional role as portfolio diversifiers due to persistent inflation.

As previously reported by MBN, Latin America faces an economic slowdown. The region is still growing "but financing is becoming scarcer and costlier as major central banks raise interest to tame inflation," according to the IMF. As a result, economic activity has started to decelerate as higher rates affect domestic credit, investments and private consumption. According to the BlackRock Report, problems across sectors such as energy, materials and agriculture are behind Latin America's high inflation. However, some economies in the region may prove to be more resilient in this new regime than global peers. Central banks in the region have more experience dealing with inflation than their developed economy peers, which was evident in the region's earlier hawkish policy responses. The region's central banks could start to ease policy by midyear, triggering a growth rebound in 2023 given the earlier hiking cycles. "In our view, Latin American central banks may start cutting rates even with inflation above target," said BlackRock. 

Repeated inflation surprises have sent bond yields soaring, crushing equities and fixed income, so many cannot produce as much as before without creating inflation pressure. Additionally, central bank policy rates are not the tool to resolve production constraints, said BlackRock. The firm's stance regarding the new playbook is broadly risk-off, with a preference for income over equities and long-term bonds. Even strategic portfolios need to be more dynamic, and getting the asset mix wrong can be even more costly. 

BlackRock points to three long-term trends keeping production capacity constrained and cementing the new regime: aging populations, persistent geopolitical tensions and the transition to net-zero carbon emissions, which is causing energy supply and demand mismatches.  

Geopolitical fragmentation is likely to foster a permanent risk premium across asset classes rather than have only a fleeting effect on markets, as in the past. Market attention is expected to stay fixated on geopolitical risks. "This is the most fraught geopolitical environment since WW II, in our view. The world is splitting up into competing blocs that pursue self-reliance," said BlackRock.

"The Great Moderation, the four-decade period of largely stable activity and inflation, is behind us, and the new regime of greater macro and market volatility is playing out. We expect to turn more positive on risk assets sometime in 2023, but we are not there yet,” said BlackRock.